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we're speaking today with Wharton
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Finance Professor Franklin Allen about
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the falling Yen and how that seems to
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have kicked off talk of occurrent War um
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one immediate reaction to Japan's New
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stimulative Economic policies has been a
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sharp drop in the Yen that's led to talk
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of beggar Thy Neighbor policies and a
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currency War among a number of global
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officials including people in Russia uh
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and Europe now most recently um Europe
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is increasingly worried that in addition
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to Japan the US and the UK and even
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Switzerland have policies that are
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holding down their currency and that's
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making the Euro stronger than it
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otherwise might be um and I think that
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Japan's policies have focused attention
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on that in a way that that was not
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happening just a few weeks ago um how
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serious are these concerns and and what
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can you tell us about them well this
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whole issue of currency Wars goes back
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quite a while now when Brazil's Finance
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Minister coined the phrase for for this
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issue and I think in a number of
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emerging econ economies and in uh places
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like Switzerland and Norway and and uh
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Sweden what we've seen is uh inflows of
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money and strengthening of exchange
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rates and in some places like Brazil
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this has caused real problems for their
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manufacturing sector in Switzerland I I
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think the government put the cap on
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because they were also worried that
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their manufacturing sector would be
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significantly hit
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Japan is the first
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large economy to try to I think manage
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its exchange rate they they may may not
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be doing that explicitly but one of the
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major effects of the policies that prime
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minister AB has said he's will introduce
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and and he is introducing is to try and
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weaken the exchange rate I think one of
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the things that has really hampered
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Japan a great deal over the last few
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years since the default of lhan is that
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they have been regarded as a safe haven
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currency and this has really hurt their
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industry a great deal so if you compare
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Korea and Japan they have similar kinds
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of industrial structures but Korea which
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allowed its exchange rate to drop a
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significant amount after the lman
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default has done much much better than
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Japan and I think the Japanese want to
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try
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and prevent their economy being stalled
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by this very strong exchange rate now
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the question is whether they'll go too
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far and they'll see an exodus of the
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money out of Japan and one of the big
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issues is why are people keeping money
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in Japan given that it's exchange rate
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may well weaken it's gone down
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significantly already but it may go down
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much much more if you look at the
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Historical even over the last decade
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movement in in the Yen it's ranged from
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80 to 110 120 depending on the time
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period you choose but it could well
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weaken considerably more and one
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wonders when people will start pulling
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their money out there's a large
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proportion of the Japanese stock markets
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held by foreigners uh a small but now
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significant 9 10% of the bond market is
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held by foreigners but the real question
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is what did Japanese investors see do
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they fully comprehend that their
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currency May weaken dramatically and it
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might be good idea from Individual
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perspective not from necessarily from
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the nation's perspective to take some of
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their money and put it overseas and if
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we see that then we could see some real
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instability in in Japan I I think one of
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the other big issues is how other
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countries will react I think the Germans
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are particularly worried Japanese car
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companies have not been as competitive
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because they've had to cut back R&D and
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all those kinds of things and so if they
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start making more profits which they are
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doing with these weaker Yen they may be
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able to start competing more effectively
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with the German car manufacturers and I
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think that's why we've seen various
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German politicians and uh Jen vman of
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the of the bundas bank start worrying
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about the the overall effects of this
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and uh I I believe uh dragi has now come
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out and made some at least failed
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references to um concerns about the
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level of the Euro yes he he made some
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comments yesterday of about
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uh that they would look and see what the
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long run effects on the on the current
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were because of course the Euro has
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strengthened significantly it then fell
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back a fair amount so we'll see what
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happens but that's kind of a warning
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shot isn't it that you know more than
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three can play at this game or however
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many are playing at it yes although I'd
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be surprised if if the uh the ECB got
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into that but they may Doh and um how
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big are the dangers that um you know the
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currency War could erupt into the
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equivalent of a shooting
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War well it's an interesting in question
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whether this is such a bad thing that
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the the the folklore from the 1930s that
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we had these beggar Thy Neighbor
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policies that when Britain went off the
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gold standard then many other countries
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followed and this led to a deflation was
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very bad I I think the historical record
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is not so clear and there are a number
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of papers that argue that in fact it
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would have been better if we'd had these
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realignments of exchange rates in that
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it would have have led to relative
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prices being much better and that that
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can benefit countries so I think we'll
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see how it plays out this time
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